BY PETER BOYLE
As the once seemingly ever-exuberant US stock market plunges (Wall Street stocks have lost US$7 trillion in value since March 2000) and more reports of big business scandals dominate the headlines, establishment economic commentators are working overtime to assure us that "everything will be alright".
Don't worry, be happy — and most importantly — don't look too closely. Keep working and spending and the "real economy" will keep growing. Just leave the capitalist system to fix itself.
Ross Gittins, the Sydney Morning Herald's economics correspondent, even had the cheek to argue that the poor CEOs are the victims. They are just working for us in this great "shareholder democracy".
Gittins claimed that CEOs have been ruthlessly harried by their shareholders and — this is his "killer point" — they weren't Kerry Packer and the other "50 families who own Australia", but ordinary working Australians. The big shareholders now, he added, "are the insurance companies, banks and pension funds that invest and manage the superannuation and other retirement savings of virtually all Australian households — rich and poor".
The dazzling numbers and the almost mystical reverence for "the markets" in the big business media can confuse most people about the workings of modern capital markets. Shares, stock options, futures, hedge funds — what do these words mean to most of us? If we are to believe Gittins and his ilk, the trillions of dollars that swirl around in this speculative chase is in pursuit of the common wealth.
The so-called "shareholder democracy" is much more advanced in the USA than in Australia, yet only 50% of US citizens own even a few shares and the top 5% of shareholders hold 94.5% of all publicly traded shares. And, as we saw in the Enron and WorldCom scandals, even within that privileged 5%, not everyone is an equal owner.
The idea that anyone who receives some income (or hopes to have some superannuation when they retire) from "owning" shares in the huge corporations that rule the world is a co-owner of these corporations is a legal fiction. In fact, under British-Australian common law shareholders do not own a part of a corporation's assets but are merely entitled to "part of the profits that the directors recommend for distribution".
Karl Marx
In the 19th century, Karl Marx offered an insight on corporate ownership and control. Capitalism was at a different stage of development then but the basic form of corporation had already come into being. Joint stock (share-issuing) companies, Marx observed, are the "abolition of capitalist mode of production within the capitalist mode of production itself".
Marx pointed out that capitalism, which claims to defend private property, is actually a destroyer of private property. The property of a great number of small owners is permanently expropriated by a relatively small number of big property owners. Those who were expropriated were forced to work for the big capitalists for wages.
We can see this process in an undisguised form in the mass expropriation of small farmers in the Third World, who today account for the mass of people in the world's refugee camps and shanty towns.
But the capitalists today also expropriate of the private property of workers, by way of banks, superannuation schemes and token employee shareholding schemes. We hand over our modest savings to a few corporate chiefs and bankers to use as they see fit. The modern corporate mogul cannot achieve the huge concentration of capital without using the savings of the broader society.
Over the last two decades, the expropriation of workers' savings has increased dramatically. In the US, public pension fund assets were $2.3 trillion at the end of the 1990s and profit-sharing savings plans (known as 401k plans) are estimated to hold $10.9 trillion.
Marx also observed: "[The joint-stock company] reproduces a new financial aristocracy, a new variety of parasites in the shape of promoters, speculators and simply nominal directors; a whole system of swindling and cheating by means of corporation promotion, state issuance and stock speculation."
These are the main players in the corporate scandals. In the US, since 1980 corporate CEO pay packages have skyrocketed, rising from 42 times the average worker's salary to 531 times in 2000.
"And it wasn't just the very best CEOs who were rolling in filthy lucre", explained James Surowiecki in the July 23 British Guardian. "Since what one executive makes tends to depend on what other executives make — a typical corporate proxy statement will include a line such as 'we want our compensation package to be competitive with the industry as a whole' — there was an irresistible ratcheting-upward effect."
Corporate CEOs are hired to serve the real owners of corporations, the ones with significant shareholdings. CEOs know whose side they are on. They are granted lucrative stock options, the offer of shares at a fixed and usually discounted rate. Sometimes, the company will even lend the CEO the money to pay for discounted shares.
Stock option packages have been around since the 1950s but they expanded after 1995 when US Congress passed a law limiting the tax-deductibility of corporate salaries of more than US$1 million. However, the law allowed an exemption for any pay that was incentive-related. So stock options also became a way of paying executives without forgoing tax benefits.
Every CEO pig was at the stock option trough, including US President George Bush and vice-president Dick Cheney, which makes a mockery of Bush's appeal for "capitalism with a conscience". All this was legal, but it also opened up greater opportunities for insider trading and the other frauds and scams that are now being exposed.
Pension fears
We are being told not to worry as the global stock markets dive because the "real economy" is fine. But ordinary folk are getting worried that their superannuation and pension funds might be in trouble.
According to Milliman USA, an actuarial and consulting firm, the 50 largest US corporate pension funds lost $36 billion in value last year from share collapses. However, with creative accounting, the companies were able to put $9 billion in net pension income on their books after deducting the costs of their pension plans.
Then there is the question of how much has been stolen by the corporate crooks. According to Standard & Poor's, losses to public funds from Enron alone are approximately $1.5 billion. What about WorldCom and the other corporate frauds yet to be uncovered?
There is nagging unease about being told that what happens in the stock market doesn't effect the "real economy". For years, capitalist propaganda about globalisation has said the opposite: the financial markets are God, they are all-wise and all-powerful. Now the Gods are crashing, they expect us to believe everything will be alright as long as we keep working and shopping? Surely one way or the other we've been lied to?
The share market is connnected to the real economy. There are many connections, but the most important of these is not the "wealth effect" that the pundits are talking about. This is the idea that, as long as share prices are heading up, workers will keep spending and that will keep the economy booming. Now that its crashing, we supposedly stop "feeling wealthy" and stop shopping.
This "wealth effect" is based on the slimmest "evidence": that the US got away with a brief recession at the end of last year because people kept consuming. Some speculate it was "patriotic shopping" in the wake of September 11.
But the statistics also show that along with the consumption came record household debt levels and this is one clue to the most profound connection with the stock market crash and the huge speculation bubble that preceded it. Most of us have to have money to spend before we feel wealthy.
The speculative bubble is based on two main elements:
First, the relatively greater success of the US ruling class in reducing wages and working conditions. This is why a quarter of the US population is living below the poverty line and average real wage rates are below 1973 levels. That "success" attracted investors to the Wall Street market from all around the world — but now it is hitting the profitability of pharmaceutical corporations because poor people can't afford their drugs!
Second, the fact that capital flocked to speculative investment because it was harder to make a profit from productive investment. Underlying the bubble was the chronic disease of capitalism — an overproduction crisis. Corporations can produce more than people can afford to buy.
In the US, there is currently overcapacity in the vehicle manufacturing, computer and telecommunications industries. Behind the WorldCom scandal, reports the conservative British Economist, lies a "telecoms bust ten times bigger than the better-known dotcom crash".
Since the mid-1990s, US share prices rose by 200% while corporate profits (as dodgy as those figures are turning out to be) only increased 40%. Wall Street was one big get-rich-quick scheme waiting to collapse.
The corporate scandals being exposed today are not the primary cause of the crisis but are showing up because of the deflation of the US share market bubble since March 2000.
Such a party had to end. But it is not just any party that is ending. It is the party. Virtually the whole world has been forced to depend on the US as the engine of economic growth. That's why global share markets are tumbling along with Wall Street.
While it is not absolutely clear what is going to happen, those economists who have being predicting a "double-dip recession" in the US may well be proved right before long. And a US recession, most economists (and even Australian treasurer Peter Costello) concede, means a global recession.
From Green Left Weekly, July 31, 2002.
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